The end of QE? Bank rate setters reject new cash injection as former colleague tells them to plan for rate rises

The Bank of England today stopped short of printing yet more money to boost the economy despite worsening economic data, as a former colleague told them to lay out plans for interest rate rises.

The monetary policy committee (MPC) did not add to the quantitative easing scheme that has already seen £375billion 'printed' to buy gilts and other assets from financial institutions, in the hope that they lend more to individuals and businesses.

The last increase came in July when £50billion was added. That extension is expected to run out this month so the decision not to extend QE suggests that the Bank is hopeful the economy can now grow without the stimulus.

Banking on a recovery: The Bank of England must
decide whether signs of a recent slowdown in the economy are enough to
justify another cash injection - which critics say is losing its
efficacy.

The economy sprung back to life in the third quarter when gross domestic product (GDP) grew 1 per cent, ending the longest double-dip recession since the 1950s. City experts predicted growth of 0.6 per cent.

But a recent run of weak purchasing managers surveys for the services, manufacturing and construction sectors in October have given credence to expert warnings that the underlying picture is much bleaker.

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The no-change decision follows hints from both the governor and the deputy governor at
the Bank, Sir Mervyn King and Paul Tucker, that its impact is reaching
its limit. Minutes from the October meeting suggested the MPC was divided over the benefits of pumping more emergency cash into the economy.

Philip Shaw, an economist at Investec, said: 'This does not necessarily mean that we have seen the last of QE. While there have been some signs of improved economic activity recently, the outlook is subject to downside risks and one cannot rule out the MPC feeling compelled to ease again at some stage.'

QE is regarded as having an
inflationary effect, eroding the spending power of
consumers. Saga, the over-50s organisation, has criticised the policy.

Director
general Dr Ros Altmann said: 'The Bank itself has always admitted that
Quantitative Easing is a drastic policy experiment which it has
introduced because "conventional" policies had been exhausted. Creating
new money to buy Government bonds may have been worth trying in 2009 to
avoid deflation but the economic problem now is stagflation, not
depression.'

The bank has undertaken other measures to boost the economy. The latest is Funding for Lending where the Bank is offering to lend to financial institutions at advantageous rates, on condition that this money is then lent on.

An update on the progress being made by Funding for Lending is expected in the Bank's next quarterly inflation report, due next week, which is also expected to increase inflation forecasts. The consumer price index (CPI) has been falling since September last year and sank to 2.2 per cent last month.

Investec's Philip Shaw said:'The
short-term CPI projections are likely to be pushed up by the recent round of
utility price increases, and beyond this we expect upward pressure from a
revised food price profile and the inclusion of higher university tuition fees.

'Plan now for interest rate rises'

The Bank also kept interest rates at 0.5 per cent - where they have remained since March 2009. Weakness in the economy pushed the Bank to ease the burden on borrowers and it fears that a rise would sap households' spending power even further and choke off growth.

There have even been calls for a rate cut, although Bank governor Sir Mervyn King said in August that it could be 'more counter-productive than beneficial'.

Former MPC member Dr Andrew Sentance today urged his ex-colleagues to set out a plan for future rate rises now so that households and businesses have time to prepare.

Tough Sentance: Dr Andrew Sentance wants the Bank to lay out a path for rate rises.

Dr Sentance was consistently more hawkish than other committee members during his time on the MPC, calling for rate rises as long ago as June 2010.

Writing in his role as PricewaterhouseCoopers’ senior economic adviser, Dr Sentance said: 'The MPC should develop and pre-announce a medium term strategy for returning Bank base rate gradually to a more normal level (say, 2-3%) by some stated date (say, mid-2015). The strategy should allow some flexibility on the exact timing of this process, within clear parameters as to what factors would influence these timing decisions.

'This strategy would enable businesses and financial institutions to plan ahead as appropriate for the consequent rise in both short term and long term interest rates (the latter being particularly important for pension funds).'

The plan suggested by Dr Sentance would increase rates far more quickly than is currently expected by the markets.

Earlier this week the money markets were implying the bank rate would actually be cut next June, return to 0.50 per cent in February 2015, rise to 0.75 per cent in February 2017 and finally reach 1 per cent by October 2018.

QE: HOW MUCH WAS USED, WHEN AND WHY

March 2009 to November 2009 - The UK had been in recession for over a year in March 2009 and despite interest rates being at an historic low of 0.5 per cent, anxious banks were reluctant to lend money.

The Bank decided to move into uncharted territory by boosting the money supply with QE, making £75billion worth of asset purchases. The recession ended but fears remained over the health of the recovery so the Bank injected a further £50billion in May of that year, £50billion in August and £25billion in November, bringing the stock to £200billion.

October 2011 - The Bank launched QE2 in October 2011 with a fresh £75billion round of asset purchases, bringing the total stock to £275billion. The economy, although unconfirmed at the time, had just entered what would become the longest double-dip recession since the 1950s.

Sir Mervyn said the move was the 'right decision' for the economy and a report from the Bank found that QE helped GDP increase by around 1.5 per cent and 2 per cent. The decision came as household incomes plunged and Chancellor George Osborne's austerity measures threatened to pile more pressure on the economy.

February 2012 - As the country battled to stave off the double-dip recession, the Bank injected a further £50billion into the economy, bringing the total to £325billion.

As well as citing domestic conditions, the Bank also rounded on the unfolding crisis in the eurozone - the UK's main export market - as being a major threat to the UK recovery.

July 2012 - A further £50billion boost was unleashed in July, bringing the total QE stock to £375billion. The eurozone crisis had intensified while UK output had barely grown for a year and a half.

In the minutes of the July meeting, the Bank said the UK was potentially facing a period of two years where there has been 'little or no economic growth'.